Turning Points

To the best of my knowledge, no one has ever figured out a truly accurate way to figure out future turning points. As far as I know, it has never been done. I don't believe that it will ever be done.

I have encountered traders who have told me that so-and-so does it, but I have never seen the proof. Nevertheless, Iâm willing to listen. I used to live in the âshow-meâ State of Missouri, so show me!

When it comes to the future, I believe that man has no absolutes. The best he can do is to determine statistically the probabilities of the occurrence of an event. But statistics are not sufficiently exact for trading without a complimentary management system that takes into account the aberrations that are bound to occur. I mentioned a few of those in previous newsletters. Here are a few more: What do you do about flood, drought, pest invasions, earthquakes, hurricanes, ice storms, tornados, volcanic eruptions, revolutions, and other phenomenon that all can push prices and market action to the extreme limits of the bell curve? What do you do when farmers decide to hold back their crops, or ranchers decide to hold over their livestock for higher prices? That's where management comes into play. However, even the best management cannot compensate for bad fills caused by crooked players, slow turnaround, bad data, fast market conditions, illiquidity, electronic failures, system failures, poor back office accounting, or a bunch of crazies flying airplanes into the former World Trade Center.

As long as you chase the idea of perfecting your trading along the lines of predicting what will happen, you are consigning yourself to failure. The best you can do is to manage your trading along the lines of what is likely to happen, and then make your best effort from there, using your human brain and your human intuition. Those are really all we have to work with.

To the best of my knowledge, no one has ever figured out a truly accurate way to figure out future turning points.

When it comes to the future, I believe that man has no absolutes. The best he can do is to determine statistically the probabilities of the occurrence of an event. But statistics are not sufficiently exact for trading without a complimentary management system that takes into account the aberrations that are bound to occur.

More...

You got it right. You can't predict the future, but you determine probabilities based on historical behavior, just as an insurance company does.

And since probabilities are not exact, you implement a trade management plan that takes off a trade the moment the setup indicating a "turning point" is invalidated.

Have you seen those automated trading systems that show you charts with green buy and red sell arrows at exact turning points? And you think, "Wow, that system picks perfect tops and bottoms every time. Why doesn't every trader in the world use it???"

Well, if you have a chance, watch one in real time and see how it's done:

For example, you're running a 3-minute intraday chart and price pushes up to an overbought condition and combined with whatever other signals are programmed into the system, a red sell arrow appears at the top of a candlestick as it closes. So you quickly sell short and place your stop just above the previous bar's high (the pivot high or so we hope). This should provide a very tight stop, therefore a low risk trade.

Now, if price continues to fall, the arrow stays there and you make money as long you manage the trade profitably and don't hold it until it reverses and becomes a loser.

However, if price suddenly reverses and takes out your stop, guess what else happens? The sell arrow above that previous bar disappears, so at the end of the day you never see these failed entries.

All you see at the end of the day is the prefect buy and sell spots the program picked, but what you don't see is exactly how many bad entries it picked originally that got stopped out. We evaluated one of these in real time and sometimes it picked 4 or 5 failed entries before capturing a solid move and leaving behind the arrow indicating that perfect trade.

So, despite catching a few nice winners, you could end up with a net losing day through "death by a thousand stops" to get there.

You never see the "turning points" that were invalidated.

As a trader, it's your job to choose turning points wisely. Rather than randomly attempting to pick a turning point, opt for confirmation via a higher low to go long or a lower high to go short. You may trade a lot less, but you'll be stopped out a lot less, too, and your entry/exit chart at the end of the day will look a lot like the perfect automated system.

Hey Joe!......there will never be a lack of people who will sell ways to "predict" what the price will do next....it is human nature to want to know what is next....so they have a great big market of folks wanting to know how to predict. Look how many Billions are spent in the business world trying to get a fix on the coming trends.

I learned from you..........you do not need to know what the next price will be. You can't, it is impossible to know. So why frustrate yourself with it. You do not need to know what the market will do, you need to know what YOU will do. If it goes up? What do you do? If it goes sideways? What do you do? If it falls what do you do?

Another super trader guy said a similar thing. Never worry about what the market is going to do, worry about what your going to do.

People want certainty in an uncertain world. And there is no more uncertain place than trading.

It's a very subtle thing, but amazing change believe me.... Marc Douglass talks about it too. The "Black Hole" of trading. You learn more and more, and yet, you lose more and more, so you work that much harder to get enough knowledge to be able to trade, only to lose some more.

You are learning the wrong thing. with all your formulas and tech indicators and all the knowledge you have of them, they still cannot tell you what will happen. You think they can, but they can't. All they can tell you is what IS happening.

My job as a trader is not to try to figure out what the price is going to do. I have to know what it IS doing, and what action I need to take or not based on the current reality. Learning the truth of price action only came by letting go of me trying to predict the future and learning to read the language in front of me. Now I know what to do if it pulls back, or stalls, or rockets up. I am prepared (or should be) to deal with whatever situation arises in a trade. And I have no anxiety based on what is going to happen next. It's a pretty cool way to trade. I learned to let the price determine my action. All the hand wringing over possible next move stuff melted away. Trading became fun.